FILE PHOTO: The sun rises behind an electric windmill in Halle, Belgium on September 11, 2019. REUTERS / Yves Herman / File Photo / File Photo
April 15, 2021
From Simon Jessop
LONDON (Reuters) – The demand for funds that select investments with strong environmental, social or governance (ESG) qualifications has increased in recent years.
Many of these funds have terms such as “ethical” or “impact” in their names. But what do these words actually mean?
The following is a glossary of key terms commonly used to describe investment styles and processes.
SUSTAINABLE / RESPONSIBLE INVESTMENT
In the absence of global consensus, the two are often used to describe a range of investment approaches fund managers use to assess ESG issues before deciding whether to buy or sell an asset. This could mean reviewing a company’s climate change preparations, deforestation records, or boardroom diversity to ensure that it is operating over time in a way that is socially and environmentally sustainable. It also includes the way the asset is then managed, such as the way the fund seeks to influence the way the company is run on issues of concern.
The most commonly used process, even with funds without a specific sustainability goal, is ESG integration, which systematically takes ESG-related factors into account as part of the investment analysis carried out by a fund manager to better manage risk and return.
One of several strategies that explicitly exclude certain stocks or sectors. Ethical mutual funds are often used in funds that avoid so-called “sin” stocks like companies tied to pornography, guns, gambling, alcohol or tobacco. They enable a person to invest in accordance with their ecological, religious or political values.
While all forms of theoretical investment have “effects”, good or bad, funds bearing the label seek to ensure that the positive effects are measurable. For example, by investing in projects where the financial return is linked to improving literacy rates or health outcomes in developing countries.
BEST IN CLASS
As the name suggests, this approach selects companies that perform best on ESG issues, even if the sector is viewed by many as less sustainable, such as: B. Oil and Gas. Unlike “ethical” investments, where investors may fail completely if the sector they are avoiding gains in value, best-in-class investments allow funds to retain the option to participate in the sector’s returns.
A positive tilt approach, often used in index tracking funds, allows a fund to buy more stocks of companies in a given index with good ESG performance, such as carbon emissions, rather than stocks with a poorer performance.
Stewardship refers to a fund manager’s responsibility to manage their clients’ money in a way that creates long-term, sustainable value. One way to do this is to “engage” or speak to the boards of directors of the companies they invest in to challenge them to perform better on ESG issues.
When words are not enough, fund managers can turn to the ballot box. In particular, anyone who owns shares in a company has the right to vote once a year on a number of issues, including whether or not to approve the work of the Board of Directors and to endorse its proposed compensation and bonus plans. In a mutual fund that may have many thousands of people involved, the fund manager or the fund management company that manages the fund decides how to vote on their behalf.
(Reporting by Simon Jessop; editing by Kirsten Donovan)
This article originally appeared on www.oann.com